How Will U.S. Tax Overhaul Impact Luxury Renters?

Why the sweeping legislation’s effect on major rental markets could be negligible

While the federal tax overhaul President Donald Trump signed into law last month could impact many homeowners and prospective buyers, the changes don’t pose any real danger to a small segment of the rental market where leases hover around $10,000 per month, experts say.

Forecasts vary from one U.S. city to another, but the common refrain among industry insiders who spoke to Mansion Global was this: If the luxury rental market that ended 2017 on a soft note shifts significantly this year, it will do so regardless of the new law. It’s unlikely that luxury rental prices will plummet or soar because people are less likely to buy this year.

“If you have $10,000 a month to rent, you’re doing it because it’s the right decision for you,” said Gary Malin, president of Citi Habitats, one of New York City’s largest brokerages. With this breed of discerning renters, he said, “it’s a convenience factor, it’s a lifestyle factor.”

What that means is that these renters can, indeed, afford to buy their properties—with or without mortgage deductions—but they opt to rent because they’re spending limited time in one location or want to enjoy posh amenities without making a down payment, he added. Some want to keep that down payment money or even all-cash purchase money more liquid and working for them in other ways, like in the stock market.

If anything, New York City’s luxury rental market is more likely to suffer in 2018 due to a glut of available units rather than the new tax law, according to Donna Olshan, president of Olshan Realty. Immediate repercussions of the law are not definite and are likely incidental for renters, she said.

New York buyers who had in past years snatched up new condos off floor plans, expecting to flip them by 2018, are finding they can’t get quite the sale price they need to break even, Ms. Olshan said. They’re putting those units out to rent and flooding an already soft market, she said, a trend that started before any tax bill was seriously discussed. That trend also explains why many landlords in high-end buildings have to offer concessions in the form of several months’ free rent or gratis gym memberships.

Throughout 2017, landlords offered near-record concessions to attract new tenants, according to a November survey of Manhattan, Brooklyn and Queens prepared by Miller Samuel. More of those are likely in 2018, too.

“What you’ve got going now is a confluence of factors that are all going to depress the luxury rental market,” Ms. Olshan said. “You have too much luxury rental inventory, and at the same time, the [potential] consequences of the tax bill.”

On the U.S. West Coast, the forecast is mixed. San Francisco ended 2017 with top-tier rents stabilizing in the $5,000 to$8,000range,said Robert Callan, a partner at McGuire Real Estate.

Once the tax changes pan out later this year—they don’t apply until people file their 2018 taxes —some home-hunters could decide that renting is more attractive than buying because of limited deductions in the new law, Mr. Callan said, in turn pushing luxury rental prices upward. Deductions for mortgage interest debt are now capped at $750,000, down from $1 million, which could dissuade those shopping in the $1 million to $2 million range, and keep them renting for longer, or looking for new, higher-priced rentals, perhaps.

If that’s the case, “we could see the rental market pick up,” he said. “It’s early to tell and it depends on the particular buyer and how their tax situation is set up.”

On the other hand, property values in San Francisco increase so rapidly that would-be buyers know they’ll lose out on appreciation if they rent instead, said Vanguard agent Jeff Plocher.

“I don’t think it’s going to have any effect at all,” he said of the tax changes. “Our rents are already very high and I think they’ll probably stay stable.”

The same is true in Los Angeles, said Hana Cha, managing director of new development for Compass. She said she’s not anticipating a drastic impact on luxury rental properties, the supply of which is more limited in Los Angeles County than in New York.

People renting properties for $10,000-plus “are not doing it necessarily because of any plus or minus vested interest in (their) mortgage deduction, so (the tax changes) are neither here nor there,” Ms. Cha said.

As for the possibility that the new, limited mortgage deduction could shift prospective homebuyers of “affordable luxury” properties toward rentals rather than sales, Ms. Cha said it’s unlikely.

“At the end of the day, homeownership is still homeownership. $750,000 in deductible is still better than nothing,” she said.

At the top of the market, buyers often pay in cash, she added, so the new limit on mortgage deductions would be moot.

The clear consensus is that it will be months before any impact of the most substantial change to the U.S. tax code since 1986 becomes apparent.

“This is an unfolding story,” Ms. Olshan said. “We’re going to have a better idea of the data in three months … after the first quarter, as it shakes out.”